Financial Reporting Model—Project Plan

Background: Statement 34 establishes the basic financial reporting model. The GASB’s reexamination of existing standards typically takes place after a pronouncement has been in effect long enough to be fully evaluated. In practice, pronouncements are added to the potential reexamination projects list after they have been fully effective for 5 years and evaluations are generally initiated after 10 years. Statement 34’s requirements have been effective for more than 5 years, including the extended implementation period for retroactive infrastructure reporting (which was not fully effective for 5 years until the second quarter of 2012).

There is a growing body of research that the GASB can leverage in an evaluation of the effectiveness of Statement 34. Most recently, a Crain Memorial Research Grant awarded in 2011 funded research on practice experience with the infrastructure reporting requirements of Statement 34, particularly regarding the use of the alternative modified approach. Some of the findings of that research echo an academic study of the use of the modified approach by state governments, Puerto Rico, and the District of Columbia.1 Another academic study reviewed the factors that determine the infrastructure information needs of public sector managers and offers recommendations for improving the reporting of infrastructure.2

Another Crain Memorial Research Grant, awarded in 2012, is funding research regarding the value of information resulting from Statement 34 to municipal bond analysts—specifically, MD&A, the government-wide statements, and the budgetary comparison. That research is expected to be completed in summer 2013. A study published in 2012 concluded that financial ratios based on government-wide financial statements are statistically significant in the credit ratings of state governments.3 Another study found that accrual-based financial ratios using information from the government-wide financial statements have significant incremental value in addition to fund-based measures.4

Research on the financial reporting model is view by some constituents as necessary for the development and acceptance of recognition concepts, particularly those pursuant to the current financial resources measurement focus. The Preliminary Views, Recognition of Elements of Financial Statements and Measurement Approaches, proposed that the current financial resources measurement focus be replaced with the near-term financial resources measurement focus. Some respondents to the Preliminary Views recommended that further work on those recognition concepts be performed in conjunction with a reexamination of the reporting model.

The potential project on the financial reporting model was ranked second in 2013 in the GASAC’s annual prioritization (first among potential reexamination projects).

Major Research Issues: Statement 34 established the present blueprint for state and local government financial reporting—the basic financial statements, notes to the financial statements, and required supplementary information including management’s discussion and analysis (MD&A). Among its many features, Statement 34 introduced government-wide financial statements containing accrual information, which notably included the reporting of capital assets, including infrastructure, for activities previously reported only on a modified accrual basis in the governmental funds. Statement 34 also required a narrative MD&A to precede the financial statements, improved upon the budgetary comparison schedule, introduced major fund reporting in the governmental and enterprise funds, and added note disclosures related to capital asset and long-term liability activity during the reporting period.

Government-Wide Financial Statements

The principal new feature introduced to the financial reporting model by Statement 34 were two accrual-based financial statements encompassing the entire financial reporting entity—the government-wide statement of net assets (now statement of net position) and statement of activities. The focus of a review of the government-wide financial statements will be to assess whether they have been effective in providing decision-useful information and supporting assessments of operational accountability. In general, this research will seek to assess effectiveness by identifying the importance of government-wide information to users, the purposes for which the information is used, and how these purposes differ from the uses of fund financial statements. Specific topics could include:

The relative usefulness of government-wide financial statements

The separation of governmental activities and business-type activities

Capital asset reporting, including general infrastructure assets

Net position categories

The net (expense) revenue format of the statement of activities

Program revenues and general revenues

The level of detail for reporting assets, liabilities, expenses, and revenues

Special and extraordinary items

Related disclosures, such as capital assets and long-term liabilities.

Governmental and Proprietary Fund Financial Statements

Statement 34 introduced major fund reporting for governmental and enterprise funds. Statement 34 also required reconciliations of the fund financial statements with the government-wide statements. Information from a government’s original adopted budget was added to the budgetary comparison. In the proprietary funds, the direct method was required for reporting cash flows. In general, an evaluation of the fund reporting requirements of Statement 34 will focus on the usefulness of fund information as it is required to be reported, perhaps in comparison with alternative methods of reporting funds. Specific topics could include:

The relative usefulness of major fund and fund-type reporting

Whether the quantitative and qualitative criteria for identifying major funds lead to reporting of the number and types of funds that users need to see

The value-added of including original budget information in the budgetary comparison

Current Developments: The final survey—that of users of financial statements—was conducted in September/October 2014. Usable responses were obtained from 176 users and analysis of the responses is ongoing.

Research Work Plan: The results of the analysis of information collected from all stages of research—archival research, roundtables, literature review, and surveys—will form the basis for the final phase of the research, which will be in-depth interviews with preparers, auditors, and users.